Can you tell us your story and how you got to become an entrepreneur?

Ash Maurya: Sure. Becoming an author and speaker, which is what I tend to do most of my time now other than run the business was never part of the master plan. As you said, I was a practicing entrepreneur. But along the way in my journey, I had started many projects, then built many products.

All of them started the same way. They all started amazing, fantastic. They all were very promising. But they didn’t end up the same way. Many of them. I ended up shutting down.

The thing that bothered me was not that I shut them down because I knew that you have to search for good ideas. I was ready for the ups and downs when I wasn’t ready for was the time it was taking to launch and validate those ideas.

I was talking about two years from when I had an idea to when I knew it would work or not, and that I realized was just too long because I had way too many ideas and not enough time.

I started studying just how I was building products, started studying how others were building products. I began a blog and around this time is when there was some work happening with Eric Ries and Steve Blank, and that eventually became the Lean Startup.

The timing was just right. I joined in on that conversation, but even then I was still an entrepreneur. I was doing this all as a side project. I was blogging. That blog grew in popularity.

Eventually, some of my readers started asking me to consider writing a book. At first, I said No, but then I ultimately got convinced. I wrote my first book in a very non-traditional way.

The blog turned into the book, and then I began just to get more immersed in this world to run a few workshops as a way to test the content. That’s when the book was getting developed. And then one day I realized that the world had changed; there were entrepreneurs everywhere.

And it was an exciting time. And I felt like this was a time to do something about it. And I decided to sell my previous business and became a kind of a full-time entrepreneur or building products for other entrepreneurs. That’s what we do at LEANSTACK, but then also continuing to develop this body of work.

What do you think are the biggest misconceptions that entrepreneurs have when it comes to starting a business?

Ash Maurya: I find that the biggest one that I also just learned as an entrepreneur is this idea of risk-taking. We all have this image of the heroic entrepreneur who will jump off a cliff and then magically figure out how to build a parachute on the way down.

I find that some of the more seasoned entrepreneurs are very risk-averse and that is that they will pack, make sure they pack a parachute and a backup parachute before they jump off of the cliff because they want to protect their downside.

And to me, this was something that I didn’t think to be true. That’s one of the misconceptions, which I think is a big one because when we start out many have the idea that it’s okay to take a lot of risks.

But in reality, the framework that we teach at LEANSTACK is one where we try to prioritize removing all the red skull, removing the riskiest pieces in order. Start with the riskiest things and then gradually what you’re left with is a business that can work.

The other one that I see and also that’s very common is more of a bias than a myth. That is the innovator’s bias, or the tendency of entrepreneurs to fall in love with their solutions. When we see an idea, we quickly jump to the first solution that enters our mind. But as we know, the first solution is not always going to be the optimal one that often it’s the wrong one.

But the challenge that we run into is we start to believe that that is what we have to build. And then we spend all our energies chasing the wrong risks. We chase the building of a product, and if that product is not something that the market needs or wants, by the time you build it and you’ve exhausted a lot of resources, you realize you have to start all over. And that often is a big setback for people at least first-time entrepreneurs.

Gennaro Cuofano: You have a framework to help entrepreneurs this process. Which emphasizes focusing on the problem rather than the solution.

Ash Maurya: One of the biases that that many entrepreneurs fall run into is this premature love of the solution. Like the first principles in science, you almost have to deconstruct an idea. We have to start with the basics. In this case, when we look at our business, we have to break it down into customers and problems.

If you don’t have the right customers who are trying to get sorted and problem solved, and no matter what solution you build, it doesn’t matter because we know that unless you’re solving a problem, customers are not going to use it.

They’re not going to pay money. Even if you can reach them. Even if you have a patent or an unfair advantage, it doesn’t matter at the end of the day because your customers don’t care. So that is the way we logically break it down, but that innovator’s bias is one of those sneaky things.

It comes upon us and it pretends to be very tempting. And when we have the idea, we think this is the solution. What we tried to do to overcome that is continuous testing.

Even though we may have a product in mind, we don’t build the entire product. This is where the notion of the minimum viable product comes in. We build something smaller. And even before that, even if we have a product that small that we want to build, we don’t even start with that.

We might start with the demo. We might first go and find customers, see if we can reach them, even talk to them. Because if you can talk to customers, we can sell them anything. We start with the end in mind and then we deconstruct our way back to the beginning and start validating at a bottom-up level. That generally is how we overcome the innovator’s bias toward a solution.

Do you think, then, it is a good idea to start selling the product even before you’ve built it?

Ash Maurya: Yes! That’s in many ways is exactly what we also teach. And if you look at the traditional way, we have sold products as we would build it first, then demo it to a customer and then sell it.

What we teach is build a demo first, sell that demo and if you can sell the demo then don’t even build the product. Instead of build-demo-sell, it is demo-sell-build. That way we can go a lot faster as we can start with demos that not only helps us validate for market risk clearly, it also helps you – in a way – to test what you’re going to build because your demo can show what the product will do and if the customer doesn’t like it, you can still change it.

Example of the Problem/Solution Fit and demo-sell-build model by LEANSTACK

This means you eliminate the product-market fit problem, right?

Ash Maurya: Yes! That’s because we are systematically testing risks because we recognize the customer market risk to be the riskiest. If we can sell, we have mitigated some of it, but now the next question is can you build what you promised? Because if you sold something without having built it, then we have the feasibility risks.

That is usually less risky, but it’s still not given. There are many companies which cannot build good products, and you can again fail, but at least you’ve proven that if you build what you show the customer, then you stand to get at least that customer.

You still have the feasibility risk, then, which might make a product yet not successful?

Ash Maurya: Of course, you know, all of that is relative. Just to show the extreme example. Richard Branson and Elon Musk are already selling tickets to the moon. They know that it is technically impossible today, but it will happen one day. And the early adopters who are willing, who wanted to be the first to go on a vacation on the moon are buying tickets already.

Gennaro Cuofano: in the entrepreneurial world, there is this thing for “crossing the chasm,” which is the ability of a high tech startup to go from early adopters to an early majority. The problem is the whole process is quite difficult, and in many cases, you might still have a business even though you deal with early adopters.

What do you think about building a business on early adopters?

Ash Maurya: Most companies never even get to saturate their early adopters because it’s just not easy to build something valuable for even early adopters. Often we joke and say, “you know, you should be so lucky even to have the chasm to jump over because most people never even get that far.” That’s one way to think of it, but the way that we try to kind of prepare for that, we try to make the early adopters not too narrow. We want to make them big enough to where you can build at least a business that is sustainable on its own. It’s going to be a small version of the business model, but at least it gives you some sunroom with which to then grow to product market fit and beyond.

That’s one approach. Of course, it doesn’t have to be early adopters as five or 10 people. It has to be of some, some reasonable scale to where it makes sense. But then the more important thing is that when you get to serve those early adopters, they’re the learning you get from them. The social proof you get from them is really what the early majority needs to actually de-risk the idea for themselves. They don’t want to be first but they can happily be second as long as they are enough first people in front of them.

Gennaro Cuofano: In your book Scaling Lean, you make that it’s not about the execution but the search of a business model.

Why is it so important the search of a business model compared to the execution?

Ash Maurya: It’s one of those things where if you look at the execution kind of mindset, it goes back to the original business planning hypothesis where we would take an idea, we would spend all this time doing the analysis and even though we didn’t know all the facts, we would raise some money. Build a team, and then start executing a plan.

That playbook used to work at a time when there wasn’t a lot of competition. If you could build a product, get it to market, and even if it was wrong, you still have the attention of customers because they would work with you.

Even if you’ve got it completely wrong, you could build a product again and that’s how big companies had survived for all these years. Today the world is very different. I read a statistic recently that there are 100 million ideas that get started every year.

That’s 100 million! That’s 300 a second! When there are those many ideas, if you spend nine months coming up with this perfect plan that isn’t flawed, in that same time, you can do the math.

There are probably lots of other ideas which are similar to yours and you only need one of them to break through. And that’s why that whole model doesn’t work. And we have to go a lot faster than before.

And now if you’re going faster, when you go so fast, you can really execute. You have to be constantly learning. And that’s why we kind of talk about this as being a search versus execution mindset is we make some rough plans through the validation process.

We are constantly correcting course, which is how business planning should have been in the first place! The business plan is such a big artifact that nobody wants to keep it up to date. A tool that we use now and then a lighter weight allows you for that kind of dynamic evolution.

Gennaro Cuofano: You argue there is a very important metric to look at when growing your business: Traction.

What is traction and why is it so important?

Ash Maurya: The question often is what is the one metric that both the entrepreneurs, innovators as well as the investors, the stakeholders want. And often times people will say money or profit, but that’s not enough because you may have money this quarter, but next quarter it goes down. It has not just to be money or profit; it has to be a rate of returns; it has to be growth driven.

And that’s what traction is about. But what’s even more interesting about traction is that is not the rate at which you make money. But rather it’s about some of the leading indicators towards making money.

For example, if I just look at a company like Starbucks and I look at their balance sheets, I can tell that they are growing because every quarter they’re making more money when I don’t know is how they are growing or why they are growing.

When you start asking the “why” that is when you need to look carefully at other aspects of the business. For instance, you need to study customer behaviors, so that you can see what customers are doing in the store that may be contributing to the most money.

And that’s where we come up with new campaigns or new policies or new experiments where we double down on those things that drive more money and then we see it the next quarter that goes up.

And that’s in many ways what we call traction! What’s exciting about traction as the rate at which a company captures monetizable value from its, that’s how we like to define traction.

Gennaro Cuofano: I think one example if you look at Amazon and its balance sheets for four you see that Amazon has been running very tight margins for years. But in reality, the reason was Amazon captured market value, and it was also pulling other businesses together. If you look at Amazon today, the composition of its business model is quite different. And even though again, the online store, it’s a very tight margin it is actually driving the growth of other business units that today contribute to most of Amazon success and margins!

Today if you look at the many tech IPOs happening you look at the financial statements and the first thing that you notice is that the bottom line is negative. They are actually running at net losses in the millions or in the billions in some cases. Many startups that didn’t exist a few years ago we call them Decacorns. And while they have crazy valuations they still don’t turn a profit!

Ash Maurya: In my opinion, that’s not the case. And this is where I mean all those companies had an inflection point. All those companies when they hit product-market fit and beyond, they had a choice to make, which is we can become a very profitable company or we can become a fast-growing company.

It was growth versus profit and many of their investors chose growth over profit because it goes back a bit to the Amazonstrategy, which is let’s get so big that then we have an unfair advantage.

The mistake though is that as you correctly defined in the Amazon case, they were essentially diversifying their business model and they were able to sustain the company at the expense of divisions within the company to build a very much stronger whole than the sum of the parts.

To me then, it doesn’t make economic sense when you’re just growing for the sake of growth with no end of it ever turning into a profit. It becomes more of a speculative game, which is what a lot of the derivative assets and the debt markets are about.

But you look at many companies, Skype being one of them that grew to a huge valuation and then got essentially sold for a very big loss and now it’s inside another company. It’s a bit like the hot potato game at some point and I’m not a huge fan of that. At some point, all companies need to turn profitable.

Gennaro Cuofano: I was reading the financial prospectus of Uber and they point out that the reason why they’re putting so much effort on growth is that they’re trying to capture what they call the liquidity network effects, which means they try to grow their network at the point where they have the whole control over it.

At that stage, they would be able to capture higher margins in the future, which we don’t know if this is going to be the case. And it is a quite risky strategy. What Reid Hoffman, co-founder of LinkedIn calls Blitzscaling or prioritizing on growth over all else.

Ash Maurya: I use the word narrative currency is that if you look at any, any kind of derivative market where we have all the housing crisis, at least in the US here, people invented all kinds of terms and they all sounded very smart and intelligent and assumed they were true. It doesn’t mean they’re going to work in the long run.

It’s a theory. I’m sure they could be right and they could also be wrong and the people were making the bets they are the ones who are going to pay.

Gennaro Cuofano: Right. And the interesting part is that if they turn out to be wrong there will be people losing a lot of money, which is not the point of entrepreneurship. Because as you said at the beginning, entrepreneurs, usually, try to minimize risk, not actually to generate additional financial risks, because they are entrepreneurs and not bankers, nor financiers.

Entrepreneurs are very practical people and they try to really launch businesses and minimize the risk.

You have an interesting way to classify business models, can you articulate on that?

Ash Maurya: I come from a technical background and I always like to think in terms of patterns and systems. And if you look at a business model, there are several actors in them. You know there are users, customers, buyers or sellers.

There are also many different business model types. And I decided to classify business models just in terms of interactions. The more interactions you have, the more complex the model.

I came up with three basic archetypes, one of them was the direct model, and that’s the simplest. This is where you have a user and that user is also your customer or it can become your customer.

I talked about Starbucks early on. That’s the example I use in the book. There is a coffee shop, we know that you go to the coffee shop, you smelled the coffee. If you like it, you buy it so you, the user becomes the customer. That’s a one actor model. That’s kind of the simplest one.

Indeed, that data which Facebook collects and then packages for advertisers is turned into money for the company. That model can be applied in many different places at any time there’s a user side that creates an asset that then gets monetized.

This can be monetization of data and the monetization of user-generated content even in a not for profit. This might sound counterintuitive, but in a not for profit, you’re essentially monetizing impact. You have people that you are serving.

Thus, you are serving people in the Red Cross and then you have donors, donors are the customers and the people that you help are going to be the users of that system. That is the multi-site model.

And then the final model is the marketplace model. And this would be like Airbnb for example. That one is easy to understand. You have buyers and sellers and they come together to conduct a transaction. And then that’s how the business makes money by either capitalizing on a percentage of the transactions from a commission or something, something of that sort of transactional fee.

Gennaro Cuofano: Interesting! I believe it’s very important to remark that a business model they say always evolving. If you think about the Google business model, there is are a lot of discussions going on – especially in the SEO and publishing world – as they fear that Google might be automating part of the process of generating content or extracting more and more content from websites. Thus, the value proposition of companies like Google changes at all times.

Thus, my idea is that you need to look at the key player around which a business model has been built. For instance, if the user gets value from the information that Google offers, then Google is going to be looking at what the users want rather than focus on publishers.

Of course, publishers are another key player, but users come first.

Is there anyone you suggest following in the business world?

Ash Maurya: I tend to be a very deliberate reader. Over the years I followed many people. When I talk about love the problem, not the solution, a lot of it is really chasing problems that keep one up or keep the business up. And that’s for me generally what I tend to follow. I look at people like Elon Musk – which apart from his lack of work-life balance – he has a very non-linear way of thinking, which is something we try to teach.

This idea of a 10x thinking way of deconstructing problems. I find that’s something you see in a lot of his ideas and his business and I think it’s a very powerful thinking process, but also a skill that can be developed and can be taught. That’s something I respect a lot from him.

I learned a lot from just watching. I never met Steve Jobs but just by watching the way his career and kind of how he went through setbacks but also how good of a storyteller he was. There are a lot of people that I guess from the more famous people. Those are the people who I tend to follow it, but behind the scenes, there are a lot of authors and thinkers from philosophy, from science, from engineering that I just constantly read because I look for patterns everywhere. And you’ll find solutions to problems everywhere. The hard part is piecing them together and trying to synthesize them towards something that that can make sense.

Gennaro Cuofano: And the 10x thinking is so important. What the Googlers called Moonshot Thinking!

Are there any companion books that you suggest reading together with Running and Scaling Lean?

Ash Maurya: Eric Ries, The Lean Startup. I really suggest that because that’s more of a big idea book, which has a lot of kind of case studies and at least gets people to understand the context in which a lot of these things apply.

I tend to read a lot of how-to books. Along those lines. I also find the Lean Analytics book by Alistair Croll and Benjamin Yoskovitz which gets more into the metrics and what you would need to be able to measure and test your business.

Gennaro Cuofano: Thank you so much Ash. It was a pleasure having you!

Ash Maurya: Sure. Absolutely. My pleasure. Thank you. Thank you.

Key takeaways

Entrepreneurs are risk-averse

Entrepreneurship is about getting in love with the problem

Avoid to fall in the innovator’s bias, or getting in love with the solution

Demo-sell-build rather than build-demo-sell

There is a key metric to assess the success of a business: Traction!

Business models can be categorized according to the actors and interactions involved in three kinds: direct, multisided and marketplace

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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy |
Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here

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